Severance agreements: What your business needs to know

On Behalf of | Oct 5, 2020 | Business Succession |

As a business owner, you may find it difficult to keep up with human resource laws and best practices. They seem to change constantly, so you may not be confident navigating the HR landscape alone. 

Separating from an employee can be a particularly complex issue. You may wish to offer a severance agreement, but what exactly does that entail? 

What it is 

A severance agreement is a contract that outlines the details of ending an employment relationship in a manner agreeable to both parties. Typically, the departing employee gets extra pay or benefits in exchange for agreeing to certain post-employment conditions. 

When to offer

Severance agreements are appropriate in some, but not all, instances. You may have promised severance in an executive’s initial hiring contract, or you may use it to encourage employees to take part in a voluntary layoff. It can also give you a measure of security when terminating a worker who may otherwise cause concern. 

What to offer

Each situation is unique, so each severance agreement depends on the circumstances. Specify when the employee will leave the firm and what each party will gain. You may offer severance pay, continued health insurance, rehire assistance and other perks that will be of value to your departing employee. 

What to ask for

As with any termination, the employee must return company property including security badges, electronics and keys. A severance agreement may also include restrictions on what the employee does after leaving. For example, you may mandate that the employee not disparage the firm, disclose any intellectual property or compete with your company for a specified amount of time. 

Ending a business relationship can be difficult. A severance agreement may soften the blow for both parties.